Purpose & Components of Cost Accounting

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  • 0:02 What Is Cost Accounting?
  • 0:48 Cost Accounting Systems
  • 1:53 Components of Cost Accounting
  • 3:19 Cost Accounting vs.…
  • 4:32 Lesson Summary
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Lesson Transcript
Instructor: Christian George

Christian has a PhD in Business Management and an MA in Accounting & Financial Management

This lesson will introduce what cost accounting is and provide a definition. It will introduce cost elements and how costs are classified in cost accounting, then compare and contrast cost accounting to financial accounting.

What Is Cost Accounting?

The business world is a grueling place for a company if you don't understand the concepts of accounting and how to manage your money. Whether you manufacture a product or provide a service, understanding the costs of that product or service is vital to your business plan and expectations for sales, growth, and development.

Cost accounting is the internal process of collecting, organizing, and analyzing financial data from within a company and advising management on the most cost efficient course of action. This information contains cost information on products and/or services that the company provides for customers, and it's used for current operations and the decision-making process for future operations.

Cost Accounting Systems

Cost accounting's goal is to provide timely and relevant information to managers. This information is only for internal purposes; this means that cost accounting doesn't have to follow the rules of standards, such as Generally Accepted Accounting Principles (GAAP), unlike the accounting systems that aid in the preparation of financial statements. As a result, there are multiple types of cost accounting systems available to companies, and many companies use more than one cost accounting system at the same time.

The following are examples of various cost accounting systems:

  • Standard cost accounting
  • Lean accounting
  • Activity-based costing
  • Resource consumption accounting
  • Throughput accounting
  • Life-cycle costing
  • Environmental accounting
  • Target costing

Each of these systems has its advantages and disadvantages. Individual companies and their managers must weigh each system independently to determine which one works best for their company and the product or service that they are offering. This lesson will not dive into each of the systems since they could easily fill independent courses in their own right.

Components of Cost Accounting

Cost elements are important to understand as one compares and contrasts different cost accounting systems. The three basic cost elements are:

  1. Direct materials
  2. Direct labor
  3. Direct overhead (either fixed or variable)

As managers determine the costs involved in getting their product or service to their customers, they must classify the costs appropriately to ensure that all of the associated costs of a product or service are included in the cost plan. The classification process groups costs together depending on their relevance to a product, service, or other event and the common characteristics that they possess.

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